IUL Infinite Banking and Premium Finance

Classification C, legitimate but aggressive. Defensible, but fact-intensive and audit-attracting.

Sold as: "infinite banking", "be your own bank", "tax-free retirement income", "premium finance", "LIRP"

The tax treatment is real. The illustration is the problem, and a lapse with a loan outstanding creates ordinary income in a year you have no cash.

The pitch

Be your own bank. Overfund an indexed universal life policy, borrow against the cash value, and take tax-free retirement income. A lender finances the premiums, so it costs little out of pocket.

What it costs you if it is wrong

This one does not usually cost you a penalty. It costs you the policy. Overfunding past the Sec. 7702A limit makes loans and withdrawals taxable LIFO with a 10 percent additional tax before age 59 and a half, and a lapse with a loan outstanding turns the balance above basis into ordinary income in a year with no cash to pay it. If the business owns the policy and the Sec. 101(j) notice and consent was not signed before issuance, the death benefit itself becomes taxable.

Red flags

The phrase 'be your own bank' is used
The illustration runs at 7 percent rather than 4 to 5 percent
You have not been shown a lapse scenario with a loan outstanding
The presentation leads with tax-free income rather than a death benefit need
The business will own the policy and Sec. 101(j) was never mentioned
The policy is deliberately overfunded and nobody ran the MEC test

Questions to ask the person selling this

1At what crediting rate is this illustrated, and what does it look like at 4 to 5 percent?
2Show me the scenario where the policy lapses with the loan outstanding. What do I owe?
3Is the policy being funded past the MEC limit under Sec. 7702A?
4If the business owns it, has Sec. 101(j) notice and consent been signed, and who files Form 8925?
5What happens if the lender calls for more collateral?
6What is the insurance need this is meeting?

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